Canadian Telecom Summit: Government has to stand firm that incumbents can’t get spectrum of startup, says Lacavera

The head of Wind Mobile is certain the startup wireless carrier is going to survive, but admits he needs help from Ottawa to do it.

“It’s been a very tough road, we’re definitely battle-scared,” chairman and CEO Anthony Lacavera said Tuesday in an interview at the Canadian Telecom Summit in Toronto on Tuesday . “But I do see light at the end of the tunnel and I do see that we’re now in a place where Wind has won the new entrant battle and is going to be around long-term.”

Of the three standalone carriers that launched after winning spectrum in the 2008 auction, Wind is the only one in independent operation: Public Mobile was bought by Telus, while Mobilicity is in protection from creditors, twice denied permission to be bought by Telus.

On the other hand, Wind’s main financier, Austrian-based VimpelCom Ltd., has been denied permission to buy Lacavera out, refused to put up millions so Lacavera could buy more spectrum in January’s 700 MHz auction and has written off its roughly $1.5 billion investment.

After four and a half years Wind has 730,000 subscribers in Toronto, Edmonton, Calgary, Vancouver and Ottawa, and Lacavera told the conference, will be in a break-even point next year before interest, taxes, deductions and amortization (EBITDA) — although it will be quite a while before it will be profitable, he admits.

But Lacavera still can’t find investors needed to help expand Wind’s network faster than he wants and to help pay for more spectrum to offer customers faster LTE service than its current HSPA+ network allows.

“We still have this spectrum issue out there,” he said. It’s very unfortunate we didn’t solve it in January and we were not able to participate in the 700 (MHz auction) but there are other sources of spectrum and I’m optimistic at this point the government is going to make sure those options are available for Wind.”

That means the Harper government will have to stand firm in not allowing incumbent carriers to get hold of the AWS spectrum held by Mobilicity (either through acquisition or its failure and resale); spectrum owned covering Toronto and unused by Quebec’s Videotron, which Rogers Communications wants to buy;  or unused spectrum owned by Western Canadian cableco Shaw Communications, which Rogers also wants to buy.

Industry Canada has said that despite the expiration of five year ban on the sale of new entrant spectrum to incumbents, it will review any transfers. It has come just short of saying flatly the 2008 spectrum owned by Mobilicity, Shaw and Videotron will never go to Bell, Rogers or Telus.

In essence, Lacavera needs Ottawa to make sure that it is the only buyer available for those frequencies. Limiting the number of buyers would mean Wind could get the spectrum “at a viable cost.” Another option is for Ottawa to make sure spectrum is set aside only for new entrants or those with small market share — like Wind — in upcoming spectrum auctions. A spectrum set-aside is what was done in the 2008 auction.

What’s holding up investors, he says, is their belief Wind will have to overpay for spectrum. “We are not going to have to overpay,” he said determinedly. “It’s going to be available at rational cost, and that’s why I commend the government for their resolve.”

Why not a little help from Ottawa, he asks: Rogers and BCE Inc.’s Bell Mobility got free spectrum to start their wireless businesses in the 1980s.

But he admits there’s a crunch coming: By around 2018 handset makers will stop making smart phones for the AWS spectrum Wind owns, so it will need an LTE network by then.

At a luncheon speech Lacavera rhymed off the company’s strengths: Wind is operating at approximately EBITDA break-even on run-rate sales of approximately $350 million a year top line with approximately $275 million of annual run-rate service revenues.  Wind had 26,000 net new subscriber additions in  the first quarter, with record sales in both April and May.  In May alone it had over 21,000 net new customers.  Average revenue per user in May was up 12 per cent over the month in 2013.

Soon an improved Canadian roaming package will be announced, as soon as the federal budget is passed which includes changes that force incumbent carriers to lower their domestic rates to competitors — another help from Ottawa that will “drop our costs dramatically,” Lacavera said.

Nor all of this is rosy. Wind can’t add as many customers as it wants at this point because of the cost. “The more we sell, ironically, in the near term the more negative our EBITDA will be because of the cost of acquisition” (such as advertising and promotions), he said in the interview. “What we are doing is managing the growth to achieve EBITDA zero.” He admits that gives up market share, even though the demand is there.

“What is clear is that the rhetoric from incumbents that there isn’t room for a fourth carrier, that’s clearly dead. “We are proof they are categorically wrong.”

That fourth carrier statement needs to be clarified: Lacavera no longer says Wind aims to be a fourth national carrier operating in every province. Now is his sight is staying the fourth biggest carrier in the provinces where he operates — Ontario, B.C. and Alberta. Unsaid is what he will do with the spectrum Wind has in the Maritimes now that Eastlink has launched its wireless service. He conceded Eastlink is the fourth carrier there.

He still believes the new entrants — Wind, Videotron and Eastlink — should partner on a national network, “but that kind of stuff is not materializing.”

In a note to investors, Dvai Ghose, head of research at Canaccord Genuity, said the company statistics Lacavera released are “quite impressive.” But, he added, its average revenue per user is still too low and it can’t attract high paying customers without LTE. Without funding, he added, “its survivability remains a question.”

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